*872 The sole income of a nonprofit corporation consisted of assessments collected from member corporations and voluntary payments, gifts, or contributions received from nonmember corporations for maintaining dikes, creating sumps, in which waste oil and water from oil wells were collected, burned, and disposed of. Held, that the amounts received did not constitute taxable income.
*452 The Commissioner determined a deficiency in petitioner's income tax for the year 1933 in the amount of $987.34 and a deficiency in excess profits tax for the same period in the amount of $359.03. The total amount, or $1,346.37, is in controversy.
The taxable net income was determined as follows:
| Cash assessments collected in 1933 | $11,722.50 |
| Total funds disbursed | 7,149.08 |
| Balance cash on hand December 31, 1933 | $4,573.42 |
| Add: Real estate purchased and included in funds disbursed | 2,607.25 |
| Net Income | $7,180.67 |
*453 Petitioner admits the collection and disbursement of the above amounts but denies that*873 the amount collected represented income to it or that the amount admittedly expended by it for the purchase of real estate constituted an expenditure for a capital asset, as determined by the respondent.
FINDINGS OF FACT.
Petitioner was incorporated October 17, 1932, as a nonprofit corporation under the provisions of Title XII of Part IV of Division 1 of the Civil Code of California. Its purposes, as stated in the articles of incorporation, were, "To collect, handle, clean, treat, transport and dispose of all normal field waste substances which result from drilling for, producing, storing, dehydrating, refining, transporting and/or treating oil, gas and other hydrocarbon substances over and upon the properties of the members of the corporation * * *." Its principal office was in Kern County, California, its chief activities being carried on in that county and in the adjoining counties of Kings and Fresno.
Several oil producing companies had been, and during the taxable year were, operating in the above mentioned counties. Prior to the organization of petitioner, they had built numerous dikes, creating "sumps", for the purpose of catching and burning, or otherwise disposing*874 of, the waste water and oil which gravitated into the ditches, draws, and barrancos. Some had been built by individual oil companies and some by an association or loose organization of the operating companies. The organization - apparently not a corporation - had broken down and had practically gone out of existence when many of the existing sumps were destroyed by the floods of 1932. The particular oil company which had been taking care of most of the problems in connection with the disposal of the waste refused to do so any longer, the waste got onto the property of others, becoming a nuisance, and threats of an injunction or injunctions against the various companies operating in the region were made by the aggrieved parties. For these reasons, petitioner was organized.
At the time of the hearing petitioner had seven directors, all of whom served without compensation. Petitioner was not authorized to issue shares of stock, but the bylaws provided, in substance, that the various oil companies operating in the several districts could become members upon being elected to membership and subscribing to the bylaws. One director was elected from each district, and each was operated*875 as a separate and distinct unit. The members operating in any district were assessed only with the expense incurred in connection with such district, plus an allocated amount of general administrative expense, and no assessment could be levied against the members by any district without the assenting vote of the director *454 from such district unless such assessment should be authorized or ratified by a majority vote of the members of such district. Assessments were apportioned among the members on a basis of "Well units", and were a lien upon the personal property of the member until paid.
Petitioner continued the maintenance of the various sumps after its organization, most of the dikes being of earthen construction and requiring frequent rebuilding, and, in connection with many of them which had been built upon the property of a member or upon other property not owned by petitioner, it signed a contract obligating it to maintain the sumps and catch basins, indemnifying the owner against loss or damage arising out of its construction, maintenance, and use, and agreeing that upon the termination of the agreement the dike or catch basin should be dismantled.
Some of*876 the oil producers in the various districts refused to become members of petitioner; but the waste from their wells flowed into the sumps constructed, or being maintained, by petitioner and it was burned or disposed of by petitioner's employees. Petitioner followed the practice of notifying all nonmember producers in the area (including the United States Government) what their assessments would have been if they were members. Many of them contributed promptly and regularly; but the evidence does not disclose the exact amount received from this source in 1933. The balance sheet as of December 31, 1933, however, shows that between the date of petitioner's organization and that date nonmember contributions had been requested in the amount of $7,226.50, of which $1,585.00 was then unpaid. The last mentioned amount included approximately $1,300 which had been billed to the United States Government but which petitioner had been advised could not be paid in the absence of an act of Congress authorizing payment. The total cash received through assessments upon members and contributions from nonmembers during the year 1933 was $11,722.50.
Petitioner had but one full time employee, its*877 manager, who burned accumulated oil, made minor repairs to the dikes, and supervised the making of major repairs or construction. Most of the new construction was done by oil company members, under contract with petitioner. The total amount expended for all of these purposes during 1933 was $4,541.83. In addition to this amount petitioner expended the sum of $2,607.25 in the purchase of the surface rights to certain real estate under the conditions hereinafter related.
In 1932 it became necessary to rebuild one of the large dikes right in the heart of the area in which petitioner's members were operating. One of the oil companies owned the oil rights, but not the surface rights. Its permission to rebuild the dike was secured; but the owner of the surface rights was not consulted and after the construction *455 had gotten under way he required petitioner to pay $25 per acre for the land. Later, and in 1933, additional land was required. The owner of the surface rights to this land ascertained that the other land owner had been paid $25 per acre and he demanded, and was paid, the same amount for the 100 acres which he owned. An additional 80 acres was purchased at a*878 tax sale for $107, making a total of $2,607.25 (sic ) expended in 1933 for real estate. The surface rights to the 100 acres of land purchased by petitioner for $2,500 were of value only for use as a sump, the land being arid and covered with alkali. The actual value of said property was not in excess of $500.
Petitioner's bylaws provide that, until dissolution, no member shall have or be entitled to claim any rights to the property of petitioner, but upon dissolution, its assets and property "in each district shall be distributed to its then members in accordance with their then ownership of well-units." Petitioner had not been dissolved during the taxable year nor was any distribution of any sort made to its members.
OPINION.
MELLOTT: Respondent, quoting the all inclusive definition of gross income contained in section 22 of the Revenue Act of 1932, 1 contends that petitioner received payments for services performed in excess of the amount expended and that it therefore had an income of $7,180.67. The amount expended in the purchase of the real estate will be considered later. Petitioner contends that the corporation had no income; that the amounts which it received*879 fall into one of two categories, neither of which is taxable; that as to the payments received from nonmembers, they were merely gifts and not taxable income under section 22(b)(3) of the Revenue Act of 1932, 2 and that the payments received from members were in the nature of capital contributions made by the stockholders, represented an additional *456 price paid for the stock, and are not taxable income but are to be treated, as respondent in his regulations had always treated such contributions, "as an addition to and as part of the operating capital of the company." (Art. 67, Regulations 77.)
*880 We are inclined to agree, in the main, with petitioner. The money received from nonmembers was paid voluntarily by them and not as the result of any valid contract. It is quite doubtful if any of the payments could have been compelled. The waste oil flowed into the sumps constructed by petitioner for the purpose of collecting the waste from the wells of members. They were so located that they also collected the waste from the wells of nonmembers - a mere fortuitous circumstance so far as the nonmembers were concerned - and when the accumulated oil was burned or otherwise disposed of they were benefited, notwithstanding the fact that petitioner had not been employed to dispose of it. We are not concerned with the question whether or not the payments made by the nonmembers were deductible as expenses. Our question is simply, Were the amounts received by petitioner mere gifts, and, if so, should they have been included in gross income? If they were gifts they formed no part of petitioner's gross income under section 22(b)(3), supra.
A gift has been defined as a voluntary transfer of property by one to another without consideration or compensation therefor. Cf. *881 . Respondent contends that petitioner rendered bills to the nonmembers for services performed and that the nonmembers simply paid the bills. This, he says, indicates that there was a consideration. But our findings show that the nonmembers were simply advised as to the amount which they would have been required to pay if they had been members. No enforceable obligation rested upon them to make payment. The rendering of the services may have created a "moral obligation"; but a payment made to discharge such an obligation is nevertheless a gift. Cf. ; ; affd., . Being of the opinion that the amounts received by petitioner from nonmembers were contributions or gifts, we hold that they should not have been included in petitioner's gross income. Cf. ; ; *882 . Inasmuch as we can not determine from the evidence the exact amount received from such source during the taxable year, it is necessary that the other questions also be determined.
Did the amounts received from members constitute income to petitioner? We think not. It is clear that petitioner was not organized for profit. The articles of incorporation so state. Its purpose was to dispose of the waste and thus obviate the necessity of each member *457 undertaking to collect, identify and dispose of that coming from its wells. It did not attempt to "sell" its services nor did it charge the member in proportion to the oil coming from its wells. It estimated the total amount necessary to dispose of the waste, assessed its members accordingly, and any funds collected during the taxable year which was not expended during that year were to be used for the same purpose during the succeeding year, thereby reducing pro tanto the amount to be collected during the succeeding year. Even though it might, for bookkeeping purposes, be labeled "surplus", it really represented an indebtedness to its members, *883 or pay in advance, for services to be rendered during a later year. It was, in no sense, gains, profits, and income as such terms have been defined in , and kindred cases. At best it was a mere accumulation, paid in by the members, to be used for the purpose of disposing of the waste or to be returned to them upon dissolution. As was said by this Board in a case somewhat analogous - - the surplus overassessment "was really an indebtedness or refund due the members and was a liability and not taxable. ; ." Cf. ; , reversing .
In view of our decision upon the above issues it is unnecessary to discuss or decide whether the $2,607.25 invested in real estate by the petitioner during the taxable year is, as contended by the petitioner, deductible*884 as an expense or, as contended by the respondent, represents a capital expenditure.
The respondent erred in determining the deficiency.
Judgment will be entered for the petitioner.
Footnotes
1. SEC. 22. GROSS INCOME.
(a) GENERAL DEFINITION. - "Gross income" includes gains, profits and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. In the case of Presidents of the United States and judges of courts of the United States taking office after the date of the enactment of this Act, the compensation received as such shall be included in gross income; and all Acts fixing the compensation of such Presidents and judges are hereby amended accordingly. ↩
2. SEC. 22. GROSS INCOME.
(b) EXCLUSIONS FROM GROSS INCOME. - The following items shall not be included in gross income and shall be exempt from taxation under this title;
* * *
(3) GIFTS, BEQUESTS, AND DEVISES. - The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income). ↩